Arthur J. Gallagher & Co. · NYSE:AJG
Arthur J. Gallagher & — Gallagher Arthur J & — Investor Presentation (February 2011)
67 slides from Arthur J. Gallagher &'s investor presentation, Feb 15, 2011
Slide 1: Arthur J. Gallagher & Co. Investment Presentation February 2011
Arthur J. Gallagher & Co. Investment Presentation February - 2011 Exhibit 99.2
Slide 2: Information Regarding Forward-Looking Statements
Information Regarding Forward-Looking Statements This investment presentation contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this investment presentation, the words “anticipates,” “expects,” “believes,” “should,” could,”
Slide 3: Two Core Businesses
Two Core Businesses Revenue – $1.8 billion EBITDAC – $365 million Brokerage Segment 74% Risk Management Segment 26% Brokerage 82% Risk Management 18% Year 2010 as reported. See important disclosures regarding Non-GAAP measures in Exhibits
Slide 4: Brokerage Segment
Brokerage Segment Revenues – $1.3 billion Retail P/C 53% Mostly U.S., Canada and U.K. Wholesale 21% Mostly U.S. and U.K. Retail-Benefits 26% U.S. and U.K. Year 2010 as reported
Slide 5: Risk Management Segment
Risk Management Segment Revenues – $462 million Workers Compensation 69% Liability 27% Property 4% Domestic 83% International 17% EBITDAC – $65 million Year 2010 as reported. See important disclosures regarding Non-GAAP measures in Exhibits
Slide 6: A Perfect Storm for Insurance Brokers?
A Perfect Storm for Insurance Brokers? • 7 Years of soft insurance pricing • Worst economic recession since the Great Depression • Zero investment yields
Slide 7: Economy – GDP shrinks
Economy – GDP shrinks -2.6% 0.0% 1.9% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% U.S. Real GDP Annual Rates of Change Source for data: Bureau of Economic Analysis
Slide 8: U.S. Unemployment Skyrockets
U.S. Unemployment Skyrockets U.S. Unemployment Average Annual Rates. Source for data: Bureau of Labor Statistics 9.3% 5.8% 4.6% 2% 3% 4% 5% 6% 7% 8% 9% 10%
Slide 9: U.S. Employment Down Million Jobs
U.S. Employment Down 9 Million Jobs Total Nonfarm Employees ( in thousands). Source for data: Bureau of Labor Statistics 129,320 134,383 137,983 126,000 128,000 130,000 132,000 134,000 136,000 138,000 140,000 YE 2007 YE 2008 YE 2009
Slide 10: Short-Term Interest Rates Fall
Short-Term Interest Rates Fall 5.0% 1.9% 0.2% 0.2% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% Average Annual Effective Fed Funds Rates. Source for data: Bloomberg 480 bps decline
Slide 11: Commercial P&C Pricing Below Year 2000
91 126 80 90 100 110 120 130 140 150 160 Commercial P&C Pricing Below Year 2000 Significantly Lagging Inflation Commercial Rate Index Pro-Forma at CPI Rate Commercial Rate Index reflects the cost of P&C premiums relative to the year 2000. Constructed using Counsel of Insurance Agents and Brokers dat
Slide 12: Global P&C Market Shrinks
Global P&C Market Shrinks -0.1% -0.8% 1.5% 4.0% -2% -1% 0% 1% 2% 3% 4% 5% Global P&C change in Premiums. Source for Data: Swiss Re's “World Insurance" sigma studies (in real terms, ie adjusted for inflation)
Slide 13: But, Gallagher Sailed through the Economic Storm
But, Gallagher Sailed through the Economic Storm
Slide 14: Gallagher's Sales Culture Outperforms Economic Environment
Gallagher’s Sales Culture Outperforms Economic Environment 0.0% -2.0% -2.0% -11.0% -5.4% -5.6% -15.0% -12.0% -9.0% -6.0% -3.0% 0.0% 3.0% 6.0% Gallagher Organic CIAB Avg. Commercial Rate Declines Gallagher’s Brokerage Segment Organic Growth
Slide 15: Gallagher's Acquisition Program Fuels Growth
Gallagher’s Acquisition Program Fuels Growth 0.0% -2.0% -2.0% 5.0% -11.0% -5.4% -5.6% 7.0% 7.0% -15.0% -12.0% -9.0% -6.0% -3.0% 0.0% 3.0% 6.0% 9.0% -15.0% -12.0% -9.0% -6.0% -3.0% 0.0% 3.0% 6.0% 9.0% Organic Revenue Growth from Acquisitions CIAB
Slide 16: Gallagher Grows Adjusted Revenue
Gallagher Grows Adjusted Revenue 4% CAGR Brokerage & Risk Management Adjusted Revenues from Continuing Operations - See Non–GAAP measures in Exhibits $1,782 $1,719 $1,635 $500 $900 $1,300 $1,700 $2,100 $2,500
Slide 17: Gallagher's Workforce Discipline & Expense Reduction – Brokerage
Gallagher’s Workforce Discipline & Expense Reduction Brokerage See important disclosures regarding Non-GAAP measures in Exhibits 16.6% 16.9% 20.8% 0% 5% 10% 15% 20% 25% 30% Operating Expense Ratio 61.4% 61.1% 60.1% 0% 10% 20% 30% 40% 50% 60% 70% Compensation Ratio
Slide 18: Gallagher's Workforce Discipline & Expense Reduction – Risk Management
Gallagher’s Workforce Discipline & Expense Reduction Risk Management See important disclosures regarding Non-GAAP measures in Exhibits 60.9% 60.9% 60.4% 0% 10% 20% 30% 40% 50% 60% 70% Compensation Ratio 23.5% 24.0% 27.0% 0% 5% 10% 15% 20% 25% 30% Operating Expense Ratio
Slide 19: Gallagher Grows Adjusted EBITDAC
Gallagher Grows Adjusted EBITDAC $362 $347 $281 $0 $100 $200 $300 $400 $500 13% CAGR Brokerage & Risk Management Adjusted EBITDAC from Continuing Operations - See Non– GAAP measures in Exhibits
Slide 20: Gallagher Improves Adjusted EBITDAC Margins – Brokerage
Gallagher Improves Adjusted EBITDAC Margins Brokerage See important disclosures regarding Non-GAAP measures in Exhibits 21.9% 19.0% 15% 16% 17% 18% 19% 20% 21% 22% 23%
Slide 21: Gallagher Improves Adjusted EBITDAC Margins – Risk Management
Gallagher Improves Adjusted EBITDAC Margins 15.6% 12.6% 10% 11% 12% 13% 14% 15% 16% Risk Management See important disclosures regarding Non-GAAP measures in Exhibits
Slide 22: Gallagher Continues Acquisition Momentum
Gallagher Continues Acquisition Momentum $145 $98 $166 $0 $40 $80 $120 $160 $200 (In millions) Annualized Revenues Acquired From 2008 to 2010: • Completed 71 deals • $409m in annualized revenues • Highlighted by Liberty Mutual/Wausau and GAB Robins acquisitions
Slide 23: Risk Management M&A
Risk Management M&A • GAB Robins Completed October 1, 2010 Acquired TPA and managed care subsidiaries Expect up to: • $50 million of annualized revenues • $10 million of EBITDAC by 2012 Added over 400 talented employees Excellent culture fit Integration going as planned
Slide 24: Gallagher Continued to Invest in the Company
Gallagher Continued to Invest in the Company • Positioned company for future expansion capacity • Systems investment Centralization Global Systems Centralized processes • Offshoring initiatives
Slide 25: Gallagher Continued Relentless Focus on Quality & Customer Service
Gallagher Continued Relentless Focus on Quality & Customer Service
Slide 26: Maintained Prudent Balance Sheet
Global Insurance Broker Avg. @ 09/30/2010 S&P 1000 Maintained Prudent Balance Sheet $s in millions. Global Insurance Brokers’ ratios are adjusted for unusual items Source for S&P 1000: Bloomberg as of 01/28/11. Gallagher @ 12/31/2010 Total Debt $550 Stockholders’ Equity $1,107 Debt to Total Capital
Slide 27: Gallagher's Stockholders Benefited
Total Returns January 2008 - February 2011 AJG versus S&P 500 47% -3% -50% -45% -40% -35% -30% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Gallagher’s Stockholders Benefited Source for data: Blo
Slide 28: The Power of Dividends
The Power of Dividends Source for Data: Bloomberg. Total Returns assume dividend reinvestment. Dividends Price Only + 47% -3% 25% 22% -20% -10% 0% 10% 20% 30% 40% 50% 60% AJG -10% 7% -20% -10% 0% 10% 20% 30% 40% 50% 60% S&P 500
Slide 29: Cash Generation
Cash Generation Dividend Below 50% See important disclosures regarding Non-GAAP measures in Exhibits (In millions) $0 $100 $200 $300 $400 Dividend
Slide 30: On the Horizon
On the Horizon…..
Slide 31: Starting from a Strong Financial Position
Starting from a Strong Financial Position • Cash available for M&A $100m available cash at 12/31/10 Added $125m of new debt last week • Debt still below target of 2x EBITDAC • Significant flexibility remains $500m in credit line • Unfunded pension is $20m See important disclosures regarding Non-GAAP
Slide 32: Three Uses of Cash
Three Uses of Cash • Re-invest in company – CapEx and acquisitions • Dividends • Repurchase shares – currently not anticipated
Slide 33: Brokerage Growth - Organic Drivers
Brokerage Growth - Organic Drivers • Cross-selling and new business initiatives • Recruiting new producers and teams Domestically and Internationally • Capitalize on niche expertise • Developing our own - Internship program • Focus on new niches • Improving carrier compensation • Implementing global
Slide 34: Brokerage Growth - Organic Drivers (cont)
Brokerage Growth - Organic Drivers (cont) • Opportunities from Healthcare Turmoil Clients need help We have the tools and resources Many consulting opportunities for new/existing clients Turmoil will continue with evolution of this bill • Expanding program managers to utilize current distribution •
Slide 35: Acquisition Strategy - Brokerage
Acquisition Strategy - Brokerage • Unlimited opportunity 18,000 retail and wholesale brokerages and agencies* just in the U.S. (Retail P&C, Benefits and Wholesale) • Owned by baby boomers who need an exit strategy yet still want to be in the business • Need depth of capabilities to grow to the next
Slide 36: Current Gallagher U.S. Locations
Current Gallagher U.S. Locations ID MT WA CA UT NV AZ NM TX OK KS NE MN WI MO AR LA TN IL WV PA NY NH ME MA CT NJ DE MD IA CO WY SD ND OR OH MI KY MS AL GA FL SC NC VT RI IN AK HI VA
Slide 37: Larger cities where we aren't located
ID MT WA CA UT NV AZ NM TX OK KS NE MN WI MO AR LA TN IL WV PA NY NH ME MA CT NJ DE MD IA CO WY SD ND OR OH MI KY MS AL GA FL SC NC VT RI IN AK HI VA Larger cities where we aren’t located
Slide 38: Acquisition Strategy - Brokerage (cont.)
Acquisition Strategy – Brokerage (cont.) • How we do it Domestically looking for “tuck-ins” as well as stand alone platforms International expansion • Joint ventures • Network of correspondent brokers source for future partners Cultural fit is crucial
Slide 39: Acquisition Strategy - Brokerage (cont.)
Acquisition Strategy – Brokerage (cont.) • Long-term strategic value Additional expertise for niches Broaden geographic penetration Additional leverage with markets, vendors, etc. • Manage and monitor closely post acquisition to assure strategy meets return on capital targets
Slide 40: Acquisition Strategy - International Brokerage
Acquisition Strategy – International Brokerage • Solid acquisition activity in 2010 FirstCity – London Securitas – Brazil SBA – Australia – now own 100% Risk & Reward – U.K. employee benefits • Global joint ventures are important Profit sharing Additional London flow through Huge geographic opportun
Slide 41: Gallagher Optimus Network
Gallagher Optimus Network
Slide 42: Brokerage Productivity & Expense Reductions
Brokerage Productivity & Expense Reductions • Upgrading and consolidating agency systems • Centralizing back office support • Utilizing offshore centers of excellence • Maintaining headcount controls • Reducing real estate footprint • Capitalizing on procurement/sourcing capabilities
Slide 43: Risk Management - Growth, Productivity & Expense Management
Risk Management – Growth, Productivity & Expense Management • Attract and retain clients with superior value proposition Unsurpassed claims handling capabilities and expertise Superior outcomes Industry-leading service experience Industry-specific best practice solutions Uniformly high levels of qua
Slide 44: Risk Management - Growth, Productivity & Expense Management (cont'd)
Risk Management – Growth, Productivity & Expense Management (cont’d) • Build on recent success in international markets Target Australia, Canada, New Zealand & U.K. Expand sales capacity and capability with a focus towards commercial sector Leverage cross-selling opportunities with AJG Int’l and dom
Slide 45: Corporate Segment Evolving
Corporate Segment Evolving • Clean-energy projects contributing Viewed as cash generation vehicles Earned $8 million after tax in 2010 May earn $4-6 million per quarter after tax starting in 2Q 2011 • Legacy investment era effectively behind us
Slide 46: Summary
Summary
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Slide 50: Significant Headwinds
Significant Headwinds Economy – GDP shrinks -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% Short-Term Interest Rates Fall 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% U.S. Employment Down 9 Million Jobs 126,000 128,000 130,000 132,000 134,000 136,000 138,000 140,000 Global P&C Market Shrinks -2% -1% 0% 1% 2% 3% 4% 5% 129,
Slide 51: Gallagher Sailed Through
Gallagher Sailed Through See important disclosures regarding Non-GAAP measures in Exhibits Gallagher Continues Acquisition Momentum $145 $98 $166 $0 $40 $80 $120 $160 $200 (In millions) Annualized Revenues Acquired Gallagher Improves Adjusted EBITDAC Margins 20.3% 17.2% 15% 16% 17% 18% 19% 20% 21% 2
Slide 52: Gallagher's Stockholders Benefited
Total Returns January 2008 - February 2011 AJG versus S&P 500 47% -3% -50% -45% -40% -35% -30% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Gallagher’s Stockholders Benefited Source for data: Blo
Slide 53: Summary
Summary • Why own Gallagher? Steady long-term growth Strong cash flows Prudent Balance Sheet History of solid dividend yield shows confidence in future growth
Slide 54: For Additional Information
For Additional Information • Website: www.ajg.com • Email: investor_relations@ajg.com • Marsha Akin: Marsha_Akin@ajg.com • Phone: 630-285-3501
Slide 55: Information Regarding Non-GAAP Measures
Arthur J. Gallagher &Co. Information Regarding Non-GAAP Measures In addon to reporting nancial result in accordance wth GAAP. this presentation, including these exhib, provide information regarding EBITDAC, EBITDAC margin, Adjusted EBITDAC, Adjusted EBITDAC matgh, Diluted Net Eanings Per Share (As A
Slide 56: Brokerage Segment
Brokerage Segment Statement of Earnings Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Commissions 183.4 $ - $ 183.4 $ 232.6 $ - $ 232.6 $ 226.8 $ - $ 226.8 $ 211.4 $ - $ 211.4 $ 854.2 $
Slide 57: Risk Management Segment
Risk Management Segment Statement of Earnings Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Fees 115.1 $ - $ 115.1 $ 114.1 $ - $ 114.1 $ 117.6 $ - $ 117.6 $ 114.3 $ - $ 114.3 $ 461.1 $ -
Slide 58: Brokerage & Risk Management Segments Combined
Brokerage & Risk Management Segments Combined Statement of Earnings Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Commissions 183.4 $ - $ 183.4 $ 232.6 $ - $ 232.6 $ 226.8 $ - $ 226.8 $
Slide 59: Brokerage Segment
Brokerage Segment Statement of Earnings Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Commissions 198.0 $ - $ 198.0 $ 249.7 $ - $ 249.7 $ 237.0 $ - $ 237.0 $ 228.2 $ - $ 228.2 $ 912.9 $
Slide 60: Risk Management Segment
Risk Management Segment Statement of Earnings Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Fees 111.8 $ - $ 111.8 $ 113.0 $ - $ 113.0 $ 113.1 $ - $ 113.1 $ 113.8 $ - $ 113.8 $ 451.7 $ -
Slide 61: Brokerage & Risk Management Segments Combined
Brokerage & Risk Management Segments Combined Statement of Earnings Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Commissions 198.0 $ - $ 198.0 $ 249.7 $ - $ 249.7 $ 237.0 $ - $ 237.0 $
Slide 62: Brokerage Segment
Brokerage Segment Statement of Earnings Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Commissions 204.2 $ - $ 204.2 $ 257.0 $ - $ 257.0 $ 251.9 $ - $ 251.9 $ 244.2 $ - $ 244.2 $ 957.3 $
Slide 63: Risk Management Segment
Risk Management Segment Statement of Earnings Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Fees 110.1 $ - $ 110.1 $ 110.9 $ - $ 110.9 $ 110.9 $ - $ 110.9 $ 128.2 $ - $ 128.2 $ 460.1 $ -
Slide 64: Brokerage & Risk Management Segments Combined
Brokerage & Risk Management Segments Combined Statement of Earnings Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Reported Adjust- ments Adjusted Commissions 204.2 $ - $ 204.2 $ 257.0 $ - $ 257.0 $ 251.9 $ - $ 251.9 $
Slide 65: Brokerage Segment
Brokerage Segment Statement of Earnings Commissions 183.4 $ 198.0 $ 204.2 $ 232.6 $ 249.7 $ 257.0 $ 226.8 $ 237.0 $ 251.9 $ 211.4 $ 228.2 $ 244.2 $ 854.2 $ 912.9 $ 957.3 $ Fees 50.4 54.8 54.9 63.5 73.9 68.5 66.0 75.8 74.8 70.3 77.6 76.7 250.2 282.1 274.9 Supplemental and contingent commissions 17.9
Slide 66: Brokerage Segment
Brokerage Segment Statement of Earnings Commissions 183.4 $ 198.0 $ 204.2 $ 232.6 $ 249.7 $ 257.0 $ 226.8 $ 237.0 $ 251.9 $ 211.4 $ 228.2 $ 244.2 $ 854.2 $ 912.9 $ 957.3 $ Fees 50.4 54.8 54.9 63.5 73.9 68.5 66.0 75.8 74.8 70.3 77.6 76.7 250.2 282.1 274.9 Supplemental and contingent commissions 16.3
Slide 67: Earnings from continuing operations - Brokerage & Risk Management Segments Combined
Earnings from continuing operations - Brokerage & Risk Management Segments Combined 132.4 $ 154.4 $ 166.8 $ Provision for income taxes 85.1 96.5 108.0 Depreciation 29.8 30.5 31.9 Amortization 43.7 55.0 60.8 Change in estimated acquisition earnout payables - 4.1 (2.6) EBITDAC - Brokerage & Risk Manag
Gallagher Arthur J & — Investor Presentation (February 2011) on 6ix